Debtor’s ‘Spend-Money-to-Make-Money Scheme’ Backfires With IRS

By Diane Davis

A couple who “consciously dedicated themselves to leading a very fine lifestyle while knowing that they were in serious debt” and spent millions in this effort, can’t wipe out their tax debt in bankruptcy, a bankruptcy court in Florida held ( Feshbach v. U.S. Dep’t of Treasury (In re Feshbach) , 2017 BL 371967, Bankr. M.D. Fla., No. 08:11-bk-12770-CPM, 10/17/17 ).

The Bankruptcy Code’s public policy favors the payment of taxes over providing an exception to bankruptcy for debtors who don’t “make an honest and reasonable effort to comply with the tax laws,” Judge Catherine Peek McEwen of the U.S. Bankruptcy Court for the Middle District of Florida wrote Oct. 17.

Bankruptcy Code Section 523(a)(1)(C) denies a discharge for a tax debt when a debtor willfully attempts to evade or defeat a tax.

To prove its case, the government must show that the debtor attempted to evade or defeat a tax by his conduct and his mental state. The avoidance must be done voluntarily, knowingly, and intentionally.

Matthew Feshbach, a financial professional, and his wife Kathleen, began using an investment strategy known as “selling short against the box” since 1980 to delay the recognition of taxable income. An investor who sells short against the box borrows matching shares of an appreciated stock that the investor presently owns and then sells borrowed shares and posts the owned shares as collateral. Selling short against the box locks in the built-in gain on the owned shares.

Years later after this tax loophole was closed, the Feshbachs filed for Chapter 7 protection.

The court held that the Feshbachs couldn’t wipe out their 2001 tax debt in bankruptcy because they willfully attempted to evade or defeat payment of taxes.

Over the period in question, the Feshbachs reported more than $13 million in income and spent more than $8.5 million to support their “abundant lifestyle,” which included a personal chef, a rental house in Aspen, and a personal travel budget of more than $530,000, the court said.

With Matthew’s level of financial sophistication, they couldn’t rely on claims that their advisors gave them bad advice, the court said.

It was “tragically foolish” to stick to their conviction of “spend-money-to-make-money,” the court said.

Luis Salazar, Salazar Jackson, LLP, Coral Gables, Fla., Mitchell S. Fuerst, Fuerst Ittleman, PL, Miami, represented the Feshbachs; Michael W. May and Robert L. Welsh, U.S. Department of Justice, Washington, represented the Internal Revenue Service; Suzy Tate, Suzy Tate, P.A., Tampa, Fla., represented Trustee Andrea P. Bauman; and United States Trustee Cynthia Burnette, Tampa, Fla., represented herself.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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